Return Fraud
What is Return Fraud?
Return fraud is an online scam that occurs when a person purchases an item from a retail store with the intent to return it immediately or use duplicate receipts to get money back. It is the act of defrauding a retail store via the return process. Fraudsters commit this crime in various ways. For example, the offender may return stolen merchandise to secure cash, steal receipts or receipt tape to enable a falsified return, or use somebody else's receipt to try to return an item picked up from a store shelf.
10 Types of Return Fraud
1. Returning Stolen Merchandise
This involves "shoplifting-to-return," where an actor steals an item and attempts to return it for a full-price refund. This tactic effectively converts stolen physical inventory directly into cash or untraceable store credit without the need for a third-party fence.
2. Receipt Fraud
This method utilizes stolen, forged, or "found" receipts to give the appearance of a legitimate purchase. A common variation involves "price-gap exploitation," where an item is purchased at a deep discount in one location and returned at a different franchise where the price is higher, allowing the fraudster to pocket the difference.
3. Employee-Assisted Fraud
A form of Insider Fraud where a staff member facilitates the return of stolen or non-existent goods. By overriding system alerts or verifying fraudulent receipts, internal actors allow the "return" to bypass standard security protocols in exchange for a cut of the profit.
4. Price Switching
Perpetrators physically swap price tags or barcodes, placing a high-value label on a low-value item. They then "return" the item at the inflated price point. This relies on the speed of the return desk and the lack of automated SKU-to-price verification.
5. Price Arbitrage
In this scheme, a fraudster purchases two similar-looking items at different price points. They then return the cheaper version as if it were the expensive one, effectively keeping the premium product for the cost of the budget version.
6. Switch Fraud
Also known as "Product Swapping," this involves purchasing a new, working item and returning an identical but broken or older version already owned by the fraudster. This is a common tactic for upgrading consumer electronics at the retailer's expense.
7. Bricking
A sophisticated form of electronics fraud where a perpetrator buys a high-value device, strips it of its internal components (CPAs, high-value chips, or batteries), and returns the "bricked" shell. The retailer is left with unsellable, damaged inventory while the fraudster resells the parts.
8. Cross-Retailer Returns
This involves attempting to return an item purchased at Retailer A to Retailer B. Fraudsters target stores with lenient return policies or those that offer "no-receipt" store credit, leveraging the credit to purchase higher-value goods that are easier to liquidate.
9. Open-Box Manipulation
An actor purchases a high-demand item, opens it to ensure it is marked as "used" or "damaged," and returns it. They (or a co-conspirator) then wait for the item to be placed back on the floor as "Open Box" inventory to repurchase it at a significantly reduced price.
10. Wardrobing (Social Fraud)
A pervasive form of "Friendly Fraud" where an item (typically luxury apparel or high-end electronics) is purchased for short-term use with the explicit intent to return it. Though the item is technically "used," it is returned as "new," forcing the retailer to absorb the depreciation and cleaning costs.
The Cost of Return Fraud
The retail industry loses about $24 billion annually in return fraud and policy abuse, accounting for 8% of returns. In 2020, of the 10% of returned transactions, 6% were fraudulent, leading to a loss of $25.3 billion for retailers. As retail shifts online, 38% of merchants see an increase in buy online, return in-store purchases, and 29% of merchants report an increase in fraudulent returns among such transactions. Furthermore, 21% of returns made without a receipt are fraudulent. As a result, merchants often raise prices to offset losses, unfortunately affecting customer experience.
Holiday Shopping Seasons Increase the Risk
25% of annual product returns occur between Thanksgiving and New Years Day and return fraud increases during this time as well. According to the National Retail Federation, a quarter of holiday shoppers buy items with the intent of returning them later. This leads to merchants preparing for a large volume of returns. In 2018’s holiday season, about 10% of returns were expected to be fraudulent, leading to a loss of $6.5 billion in holiday return fraud. Due to high customer volume, sometimes loss and fraud prevention measures become more relaxed despite the increased vulnerability. As a result of increased purchase and return volume, retail staff becomes overwhelmed with handling returns as well as investigating fraudulent ones. Often this leads to more staff being hired over the holiday season, increasing the merchant’s operating costs. If they choose not to or cannot hire more staff, the existing staff becomes overworked trying to keep up with the increased volume.
How to Prevent Return Fraud
Returns are necessary for retail to promote customer loyalty and satisfaction. Unfortunately, this poses a challenge for combatting return fraud. Policies must be clear and restrictive enough to effectively prevent return fraud, but flexible to avoid discouraging legitimate returns and exchanges.
They also should be easy to access on online shopping sites and packaging/receipts for shipped goods. In addition, as much data as possible must be collected from fraudulent returns to prevent repeat offenses and inform fraud prevention for future threats. Collective intelligence informed by transaction data helps fight future fraud by arming prevention and detection services.
Fight Return Fraud with Fraud.net
Fraud.net has a large suite of solutions helpful in fighting return fraud, among other types of fraud. With identity verification, dark web monitoring, and datamining services, fighting return fraud becomes easier and more efficient.Contact us today for a free demo and recommendations to help you protect your profits from return fraud.
Return Fraud FAQ
What is the primary difference between return fraud and policy abuse?
Return fraud involves a clear intent to deceive for financial gain, such as using forged receipts or returning stolen goods. Policy abuse, often called "Friendly Fraud," involves customers exploiting a merchant's terms—like "wardrobing"—to use products for free. While the intent differs, both result in significant margin erosion and inventory distortion.
How does return fraud impact a retailer’s bottom line?
The impact extends far beyond the loss of the initial sale. Retailers must account for reverse logistics costs, including shipping, inspections, and refurbishing. Additionally, "bricked" or used items often cannot be resold at full price, leading to permanent inventory devaluation and skewed stock levels.
What is "Serial Returner" behavior in e-commerce?
A serial returner is an individual who exhibits a high-velocity pattern of purchasing and returning goods. While some are legitimate customers, many are engaging in "bracketing" or wardrobing. Advanced fraud detection systems track these patterns across multiple accounts and payment methods to identify users whose return-to-purchase ratio makes them unprofitable.
Can return fraud be committed by employees?
Yes. Employee-assisted return fraud is a common form of insider threat. It occurs when a staff member processes a return for a non-existent item or overrides a "no-receipt" warning to issue cash or credit to a co-conspirator. This highlights the need for real-time monitoring of POS (Point of Sale) transactions for anomalous overrides.
How can merchants detect "Bricking" before a refund is issued?
Detecting bricking requires a combination of physical inspection and automated fraud scoring. Merchants can use historical data to flag high-risk categories (like high-end electronics) and implement a "delayed refund" policy. This allows for a technical inspection of the internal components before the funds are released.
What are the most common red flags of a fraudulent return?
Key indicators include:
- No-Receipt Requests: Frequent attempts to return high-value items for store credit without proof of purchase.
- Velocity Spikes: A single identity or payment method attempting returns at multiple locations in a short timeframe.
- Identity Discrepancies: The person returning the item does not match the original purchaser’s digital footprint or geographic location.
How does AI help prevent return fraud at scale?
AI platforms like Fraud.net analyze billions of data points to identify "return-centric" fraud rings. By linking disparate data—such as IP addresses, device fingerprints, and behavioral patterns—AI can predict the likelihood of fraud before the return is authorized, enabling merchants to implement dynamic return policies for high-risk users.
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